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The Due Process Clause of the U.S. Const. amend. XIV imposes two requirements for apportioned state taxation: a "minimal connection" or "nexus" between the interstate activities and the taxing state, and a rational relationship between the income attributed to the state and the intrastate values of the enterprise. The tax cannot be out of all appropriate proportion to the business transacted by the appellant in that state.
Appellant Exxon Corp., a vertically integrated petroleum company doing business in several States, was organized, during the years in question in this case, into three levels of management, one of which was responsible for directing the operating activities of the company's functional departments. Transfers of products and supplies among the three major functional departments -- Exploration and Production, Refining, and Marketing -- were theoretically based on competitive wholesale prices. Appellant had no exploration and production or refining operations in Wisconsin and carried out only marketing in that State. During the years in question, Exxon filed income tax returns in Wisconsin using a separate geographical system of accounting which reflected only the Wisconsin marketing operations and showed a loss for each year, thus resulting in no taxes being due, but appellee Wisconsin Department of Revenue, upon auditing the returns, assessed taxes, based on Exxon’s total income, pursuant to Wisconsin's tax apportionment statute. Ultimately, after Exxon’s application for abatement had proceeded through administrative and judicial review, the Wisconsin Supreme Court held that Exxon’s Wisconsin marketing operations were an integral part of one unitary business and that therefore its total corporate income was subject to the statutory apportionment formula. The court further held that situs income derived from crude oil produced by Exxon outside Wisconsin and transferred to its own refineries and thus part of the unitary stream of income was apportionable under the Wisconsin statute despite appellant's separate functional accounting system, and that taxation of such situs income did not impermissibly burden interstate commerce.
Was apportionment violative of due process when a sufficient nexus existed between Exxon’s unitary business and interstate activities and Exxon’s internal functional accounting was not binding on Wisconsin?
The court rejected Exxon’s arguments and affirmed the assessment in favor of Wisconsin Department of Revenue, explaining Exxon’s functional accounting to prove extraterritorial reach of the state tax was not binding on a state. The court explained the commerce clause did not require that any income tax a taxpayer was able to separate through internal accounting methods be allocated to the states in which the production centers were located when the geographic location of raw materials did not alter the fact that the income was part of a unitary business subject to fair apportionment between the states. The court found Exxon’s interstate activities had a sufficient nexus to Wisconsin to support such apportionment.